Non-salary withholding on payments to residents under the Income-tax Act, 2025 is organised in the Table to section 393(1): column B describes the nature of the income or sum, column C the person who must deduct, and column D the rate and threshold. The company's job is classification before computation — identify what the payment substantively is, find its row, check that the company is a payer named in column C, and only then calculate. Withholding under the wrong row is a default even when the arithmetic is perfect.
Substance first, labels never
Vendors label invoices freely — "consultancy", "services", "charges", "reimbursement" — and none of those labels decides the withholding row. What decides is the substance of the contract: is this a contract for carrying out work, fees for professional services, fees for technical services, rent, commission, or something else entirely? Read the agreement, not the invoice header.
The classic border disputes repeat every year. Manpower supply versus professional services — though from 1 April 2026 section 402(47)(f) treats supply of manpower to work under the payer's supervision, control or direction as 'work', so it sits under Sl. No. 6(i). Maintenance contracts with embedded spares. Software access characterised as royalty, service, or goods. Each border has a classification answer with real money behind it, because the rows carry different rates and thresholds. Within serial number 6 of the Table alone, a contract for carrying out work paid by a company falls under Sl. No. 6(i) at 1% or 2%, while fees for professional services fall under Sl. No. 6(iii) at 10%. Record the substance finding per vendor, with the contract clause that supports it.
Check your position first
Enter these inputs per payment before selecting any row. Classification runs payment by payment, since one vendor can supply two natures in one month.
Old labels, new table
Assessment year 2026–27 still speaks the old language — 194C for contractors, 194J for professional or technical fees, 194-I for rent, 206AA for a missing PAN. Tax year 2026–27 runs the new Act. The Income Tax Department's "Utility to check provisions of Income-tax Act, 1961 vis-a-vis Income-tax Act, 2025" maps them as follows:
A section-level map tells you where a provision now lives, not which Table row, rate or threshold applies; those come from the text of section 393 itself. Keep each period's workings under the Act that governed it — never relabel a historical computation with new section numbers.
Credit or pay — whichever is earlier
Section 393(1)(c) requires deduction at the time of credit of the sum to the payee's account or at the time of payment, whichever is earlier. A provision booked in March with payment in April still needs March deduction; an advance paid before any booking needs deduction at payment. Year-end provisions are the danger zone: every credited-but-unpaid vendor balance at 31 March needs its row checked, since the credit itself triggered the duty.
Do it in order
- Fix the period: old-Act assessment year or new-Act tax year, since the table and the labels change across the transition.
- Classify the substance from the contract: work, professional, technical, rent, commission or other — and document borderline calls with reasons.
- Check the payer column: Sl. No. 6(i) applies where the payer is a "designated person", which section 402(11)(d) defines to include any company; Sl. No. 6(iii) applies where the payer is a "specified person", which section 402(37)(a) defines to include any person other than an individual or HUF. A private limited company is both.
- Test the threshold on the payment and on cumulative payments/credits to the payee for the year. Under section 393(1)(a), once the amount or aggregate exceeds the column D threshold, tax is deducted on the entire amount, not only the excess.
- Choose the rate, applying lower/nil certificates where held and the section 397(2)(b)(i) rate where PAN is missing.
- Calculate, deduct, deposit and record: compute on the correct base (reimbursements need their own treatment), deposit within the due date, and log the decision per invoice.
- Reconcile quarterly: tie deductions to challans and to the quarterly statement rows before filing, so the return matches the ledger to the rupee.
Worked example: ₹1 lakh professional fee
A private limited company receives a resident chartered accountant's invoice of ₹1,00,000 for advisory work. The engagement letter confirms professional services, the payee has furnished a valid PAN, no lower-deduction certificate is held, and nothing else has been paid to this payee in the tax year.
Now see what misclassification costs. Suppose the accounts team had treated the same invoice as a contract for carrying out work under Sl. No. 6(i). If the CA practice is a firm (not an individual or HUF), that row's rate is 2%, so the company would have deducted ₹2,000. The correct deduction is ₹10,000, leaving a short-deduction of ₹8,000. Section 398(3)(a)(i) charges simple interest at 1% for every month or part of a month on that ₹8,000 from the date it was deductible until the date it is actually deducted — the arithmetic was correct, but the row was not.
The reverse also happens. A genuine works contract for carrying out work, invoiced as "services", wrongly taken at 10% means over-deduction from the vendor's payment, a vendor dispute, and a refund claim the vendor must chase. Both errors start at classification.
Reimbursements and advances need their own treatment
Our practice: "reimbursement" printed on an invoice proves nothing by itself. Withhold on the invoice under the applicable row of section 393 unless the company holds, voucher-for-voucher, the third-party bills and evidence of no markup, and the basis for treating any part as a pass-through has been reviewed and recorded.
For a contract for carrying out work, the Note to Sl. No. 6 of the Table governs material supplied with the work: for work of the kind specified in section 402(47)(e), tax is deducted on the invoice value excluding the value of material if that value is shown separately in the invoice, and on the whole invoice value if it is not. This applies only to that kind of work; for other contracts, deduct on the sum credited or paid under the contract. Ask vendors to show material separately where the contract supports it.
Advances reverse the timing intuition: money out before any credit still triggers deduction at payment under section 393(1)(c). Teams that deduct "when the bill comes" systematically miss advances. Control it at the payment release stage — no release without a withholding check.
If you get it wrong
Under section 398(3)(a) of the Income-tax Act, 2025, failure to deduct draws simple interest at 1% for every month or part of a month from the date tax was deductible to the date it is deducted, and failure to pay after deduction draws 1.5% for every month or part of a month from deduction to actual payment; section 398(3)(b) requires that interest to be paid before the statement is furnished. For a sum payable to a resident, section 35(b)(i) of the same Act disallows 30% of the expense where tax is not deducted, or not paid by the section 263(1) due date, with that 30% allowed in the tax year in which the tax is paid. A late statement under section 397(3)(b) attracts a fee of ₹200 for every day the failure continues under section 427(1), capped at the tax deductible under section 427(2)(a), and may attract a penalty of ₹10,000 to ₹1,00,000 under section 461(1), unless the conditions in section 461(2) are met; failure to deduct may attract a penalty equal to the tax under section 448. Never quote old section numbers for new-period defaults.
FAQ
Contractor or professional — how do we tell?
Read what the vendor actually does under the contract: execution of work with labour and material points to Sl. No. 6(i), skill-based advisory points to Sl. No. 6(iii). Mixed contracts need line-by-line splitting or a documented dominant-nature finding.
Do we deduct on provisions booked but not paid?
Yes — section 393(1)(c) makes credit a trigger as much as payment. Review every year-end provision balance for its row before closing the books.
Vendor has no PAN. What rate?
Section 397(2)(b)(i) requires deduction at the higher of three rates: the rate specified in the relevant provision of the Act, the rate or rates in force, or 20% (5% where the deduction is under section 393(1) Table Sl. No. 8(ii) or 8(v)). So 20% is the floor in the general case, not a ceiling — if the row's own rate is higher, that rate applies. Section 397(2)(c) carves out long-term bond interest and prescribed payments to non-residents other than companies. Obtain the PAN before payment instead of absorbing the higher deduction silently.
Does a nil certificate mean no records?
No. A lower or nil certificate changes the rate, not the record-keeping: log the certificate number, validity and rate applied per payment, since the quarterly statement still reports the transaction.
194C/194J/194-I in the new year — which rows?
All three move to section 393, with their definitions in section 402. Contract work by a company payer sits at Sl. No. 6(i); professional and technical fees at Sl. No. 6(iii). For rent, read its own row in the section 393 Table rather than carrying over the old rate.
Sources
- Income-tax Act, 2025, section 393(1) and its Table (Sl. No. 6(i) and 6(iii), with the Note to Sl. No. 6)
- Income-tax Act, 2025, section 402(11) ("designated person") and 402(37) ("specified person")
- Income-tax Act, 2025, section 397(2)(b)(i) and 397(2)(c) (deduction where PAN is not furnished)
- Income-tax Act, 2025, sections 35(b)(i) (disallowance), 398(3) (interest), 427 (statement fee), 448 (penalty for failure to deduct) and 461 (penalty for failure to furnish statements)
- Income Tax Department, "Utility to check provisions of Income-tax Act, 1961 vis-a-vis Income-tax Act, 2025" (194C, 194J, 194-I → 393; 206AA → 397)
- The company's contracts, invoices, PAN/certificate file, challans and quarterly workings
What to send for a review
Send your vendor contracts with payment natures, cumulative values, PAN and certificate facts, and the credit/payment dates. The review returns your invoice-level withholding decision log with row references.
Next steps on TDS compliance
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